When you’re living paycheck-to-paycheck, emergency expenses can send you into a state of panic. Easy access to money when you need it is typically what an emergency fund is for. But if you aren’t in a position to save, you likely don’t have cash to fall back on during those unexpected times. So what do you do?
This is where short-term loans (commonly called short-term cash loans or payday loans) may come in handy. It seems like a perfect solution: a loan you can get approved for within hours with cash transferred to your account immediately. But with any type of debt comes a list of serious things to consider.
So should you rely on short-term loans when strapped for cash?
The answer: only if you are out of options.
What are short-term loans?
Short-term loans typically require repayment within 90 days. Sometimes it’s by your next payday (hence the common term “payday loan”). Since these types of loans have to be paid back so quickly, they’re usually only given in small amounts
Once applied for, the loan terms are reviewed and either approved or denied within hours. Then the money is deposited directly into your bank account.
Pros of short-term payday loans
Short-term cash and payday loans can provide financial flexibility to people who live paycheck-to-paycheck. Since the funds are deposited to your bank account, you have instant access and can use the money any way you want.
Another benefit to short-term loans is their flexibility. There are now more online lending options that allow you to apply at any time day or night. Because so many online lenders are now available, there’s no need to go to a bank or loan office during business hours.
Plus, as you repay your loan and build up a reliable history with your lender, you are more likely receive higher loan amounts in the future. While you wouldn’t want to rely on this type of financial service too often, it could be useful to know that you have emergency cash available if you ever need it.
Cons of short-term cash loans
Let’s talk about the number one reason you shouldn’t use a short-term loan: it’s the most expensive type of debt you can carry. And yes, it can be even more expensive than carrying a balance on your credit cards.
Interest rates on short-term loans are often much, much higher than the typical loan offered by a bank or private lender: upwards of 400% APR. That’s $15-$30 for every $100 you borrow.
You can also be hit with hefty charges if you don’t repay the loan on time. Since you are expected to pay off the loan within a short time frame, you should only consider a short-term loan if you are 100 percent confident in your ability to pay it back by your next paycheck and have no other cash advance options.
And, like any loan, be prepared to have your credit checked. Your credit will also be affected if you are unable to make payments.
Bottom line: short-term loans can be dangerous and are generally considered predatory financial products. After all, there’s a reason Google recently decided to ban payday loan ads. As Google reps reported, “Research has shown that these loans can result in unaffordable payment and high default rates for users.”
Normally, it’s the people who don’t have access to credit or savings accounts that use this type of loan. If they don’t have good credit or savings, they’re unlikely to have the kind of income and/or financial skills necessary to pay back the loan in full and on time. Thus, a cycle of expensive debt occurs, keeping borrowers forever indebted and unable to get on solid financial footing.
Should you take out a short-term loan?
If you have good credit, know that you will have the funds needed to repay your loan as quickly as possible, and aren’t worried about high interest rates, you could be a good candidate for a short-term loan. Again, because of the expense involved in taking out a short-term payday loan, it’s really only a last-resort option.
Instead, consider a personal loan for major expenses if you don’t have access to emergency savings or a credit card. The best personal loans charge lower interest rates, fewer fees, and offer a longer repayment period so you’re not caught in a cycle of borrowing.
Short-term cash loans can be a slippery slope. High interest rates and fees can make a financial emergency into a much larger debt problem that can be hard to escape if you aren’t careful. Avoid them at all costs and educate yourself about the alternatives to short-term loans.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
|7.73% – 29.99%||$1,000 - $50,000|
|6.28% – 15.62%1||$5,000 - $100,000|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%||$5,000 - $35,000|
|4.99% – 29.99%||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%2||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%||$2,000 - $25,000||Visit LendingPoint|
|5.99% – 35.89%||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%||$2,000 - $35,000||Visit Avant|